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South Africa's Economic Outlook: Challenges and Strategies for Growth

This presentation highlights the challenges and strategies for sustained growth in South Africa's economy. It discusses the importance of long-term commitment and trust in policymakers, as well as the need for a credible vision and strategy for the future. The Global Economic Outlook and IMF forecasts for GDP in 2013/2014 are also addressed, emphasizing the need for domestic factors to drive growth. The National Development Plan is presented as a roadmap to a stronger and better economy by 2030. Collaboration and cooperation among key stakeholders are emphasized to address the socio-economic challenges and achieve job-rich growth.

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South Africa's Economic Outlook: Challenges and Strategies for Growth

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  1. BUSINESS UNITY SOUTH AFRICAPRESENTATION TO THEPARLIAMENTARY STANDING COMMITTEE ON FINANCE2013 MEDIUM TERM BUDGET POLICY STATEMENTPROFESSOR RAYMONDPARSONSSPECIAL POLICY ADVISER, BUSINESS UNITY SACAPE TOWNTUESDAY 29 OCTOBER 2013

  2. ‘IN FAST-GROWING ECONOMIES, POLICYMAKERS UNDERSTOOD THAT SUCCESSFUL DEVELOPMENT ENTAIL DECADES-LONG COMMITMENT, AND A FUNDAMENTAL BARGAIN BETWEEN THE PRESENT AND THE FUTURE. EVEN AT VERY HIGH GROWTH RATES OF 7% TO 8% IT TAKES DECADES TO MAKE THE LEAP FROM LOW TO RELATIVE HIGH INCOMES … THIS BARGAIN WILL ONLY BE ACCEPTED IF THE COUNTRY’S POLICYMAKERS COMMUNICATE A CREDIBLE VISION OF THE FUTURE AND A STRATEGY FOR GETTING THERE. THEY MUST BE TRUSTED AS STEWARDS OF THE ECONOMY AND THEIR PROMISE OF FUTURE REWARDS MUST BE BELIEVED’ GROWTH REPORT: STRATEGIES FOR SUSTAINED GROWTH AND DEVELOPMENT (2008)

  3. Global Economic Outlook (1) • Global economic outlook slightly more positive • Developed world looking a little better, but downside risks still exist • US looking more economically sustainable, despite fiscal uncertainties • Japan's 'Abenomics' experiment successful so far • EU also improving, but still vulnerable with long term structural questions • Developing world is more subdued but with challenges • Possible end of quantitative easing in due course has implications for capital flows and cost of capital • China's growth is holding at 7% plus, but economy fuelled by massive and possibly unsustainable credit creation • Vulnerable economies with twin fiscal and current account deficits... • Morgan Stanley lists five 'fragile currencies': India, Brazil, Indonesia, SA and Turkey

  4. Global Economic Outlook (2)IMF OUTLOOK FOR GDP IN 2013/2014 • The global economic outlook has improved moderately in developed economies and growth continues in emerging markets, but at a slower rate than in 2012. • SA must look internally to alleviate domestic growth and employment constraints if it wants to raise its growth rate above the current 2% expected in 2013. • The weak global economic outlook is not helping but SA must concentrate on the domestic factors over which it has control to move forward with planned structural reforms to boost growth and create jobs.

  5. Domestic Economic OutlookFORECAST • There is a close convergence between the economic forecasts of the MTBPS, BUSA and other estimates of future key economic indices and prospects. • The assessment of SA economic prospects by the MTBPS is seen by BUSA as realistic and balanced, as well as the challenges which arise out of these trajectories in addressing unemployment, poverty and inequality.

  6. IN A NUTSHELL, WHAT HAS HAPPENED SO FAR? • Aside from a few short wind-fall episodes, SA has remained a modest 3.0% to 3.5% growth performer. It has not yet discovered within itself the magic to transform itself towards 5% or 6%, or even higher average growth performances, as some other emerging economies have done. There has been slippage in SA’s global competitiveness in recent years. SA is even beginning to lose economic ground in Africa. • And thus, after a short, speculatively driven consumption-dominated boom during 2004-2007, and after a short sharp recession following the global economic crisis in 2008/2009, we now find ourselves once again constrained in a 2.5% to 3% growth trajectory, with a significant loss of growth drivers  and focused purpose. Labour relations and collective bargaining are under unprecedented strain. • Many analysts believe that SA's long run growth performance could not exceed 3.5% at best, unless the present constraints and bottlenecks are progressively lifted. • The good news is that we now have the National Development Plan (NDP). While it claims to be neither perfect not complete, it sets out a clear roadmap and firm proposals to tackle SA 's socio-economic challenges. It also injects a strong degree of urgency into efforts 'to fix the future, starting now‘.

  7. THE NDP AS A ROADMAP TO AN ECONOMY THAT WILL BE BIGGER, STRONGER AND BETTER BY 2030 • BUSA supports the point of departure in the MTBPS that the NDP is now the framework within which policies and projects will be increasingly aligned • SA's economic performance is well below its potential, given that the NDP wishes to see an average of 5.4% growth pa in due course, which could almost triple the size of SA’s economy by 2030. • Several red lights are flashing about SA 's present sluggish economic performance • SA needs 'long-termism' in its economic planning and decision-making in both the public and private sectors • Business needs a more certain and predictable policy environment through the NDP, which then underpins investor confidence • Key stakeholders need to collaborate and cooperative on a much bigger scale to address the socio-economic challenges facing SA and make the NDP work • The NDP provides such a platform for collaboration and partnership to achieve faster job-rich growth • SA needs to carve out a bigger share of global trade and investment to support its growth and development goals, at a time when SA's share of world exports is declining

  8. BUSA WELCOMES SEVERAL ASPECTS OF THE 2013 MTBPS (1) • BUSA sees the MTBPS as a frank and transparent process. The MTBPS will apparently meet the 2013/14  fiscal deficit target of 4.2%, as newly defined, and continue to strike an appropriate balance between the consolidation of debt and support for the economy. Spending restraint is the key theme in the MTBPS. • The MTBPS plans to consolidate the deficit so as  to level off the public debt trajectory and sees SA's debt-to-GDP ratio as sustainable. It is positive that tax revenue receipts have shown resilience, even though it may be the result of special factors. • The intention to manage the risks to safeguard fiscal sustainability, recognizing that the public sector wage bill has exceeded the rate of inflation over the past several years and the need to improve the monitoring of wage-bill trends. Personnel costs are now nearly 40% of government non-interest spending. • The introduction of  cost-containment measures in the public sector by imposing restrictions on the use or purchase of items such as motor vehicles, credit cards and catering. While these steps will not in themselves necessarily make a big difference to SA's public finances, BUSA believes they send a powerful message that wasteful expenditure in the public sector needs to be curbed and it will help to reinforce a culture of financial discipline.

  9. BUSA WELCOMES SEVERAL ASPECTS OF THE 2013 MTBPS (2) • The commitment to improve planning and decision-making to speed up delivery of infrastructural projects, as these remain important drivers of growth, competitiveness and jobs. • The introduction of tax legislation to incentivize business to employ youth and to facilitate the introduction of youth to the world of work, given the tremendous challenge presented by the level of youth unemployment in SA. Measures to reduce the costs of hiring younger workers are supported by BUSA. • Continued emphasis on improving access to finance and support services for small businesses, which are expected by the NDP to create the bulk of the jobs required by 2030. The creation of business incubators needs to be accelerated. • Although the fastest-growing expenditure item in the budget remains interest payments, it is reassuring to know that capital spending is now the most rapidly-growing component of non-interest spending, since this emphasis reflects the potential to add to productive investment and hence to growth.

  10. SOME RISKS AND VULNERABILITIES IN THE MTBPS (1) • The projected growth rate of 3.5% by 2016 is woefully inadequate to meet SA's socio-economic challenges. Growth estimates have again been revised downward in the MTBPS on both international and local factors. In recent years SA's growth has been lower than in peer emerging markets and commodity exporters. In BUSA’s view this reinforces why the NDP should be implemented sooner, rather than later, if more positive outcomes are sought. Remember that the NDP is already a compromise plan. • The NDP, New Growth Path (NGP), and IPAP need to be aligned. Although it is said that the NDP trumps all other plans, these differing perceptions among businesspeople needs to be reconciled and uncertainty removed. While the three documents agree that employment growth is SA's top priority, they offer conflicting assessments of what is obstructing employment growth, what sort of new jobs should be created, and at what pace. • There are several key quantitative targets in both the MTBPS and the NDP which are essential to the successful implementation of both. Yet although both documents and other policies emphasise the importance of SMMES and emerging business, no targets exist. BUSA believes that the macro-targets should include a clear commitment to create, say, 2 million new enterprises by 2030, which will be needed if 11 million jobs are to be created by then. The ultimate test for the success of both the MTBPS and the NDP will hinge on effective implementation, in collaboration with the private sector. • The fiscal outlook in the medium-term is less favourable than that presented in February 2013. Interest payments continue to leave less space for socio-economic priorities. For BUSA this highlights again that eventually all roads lead to the need for much higher job-rich growth and for effective implementation of what has been decided.

  11. SOME RISKS AND VULNERABILITIES IN THE MTBPS (2) • The possible positive impact of the draft tax legislation to encourage youth employment needs to be weighed against the job losses that are expected when the latest labour law amendments come into operation. The latter are not viewed by business as being particularly employment- friendly. The growth in private-sector employment is far below the rate required to absorb new entrants into the labour market • Excessive reliance on capital inflows exposes SA to swings in investor sentiment. Capital flow reversal is a risk which could be triggered by external developments but also by domestic factors such as spikes in labour unrest. A policy of higher SARB foreign exchange reserves would help to lower balance-of-payments risks and provide more of a shock-absorber. Inflation is projected over the next few years to be above the world average. The margin for error in policy has shrunk. • Although many analysts have acknowledged the MTBPS forecast that net public debt will stabilize at 44 % of GDP by  2017/18,  the fact remains that this plateau will be reached later than previously anticipated and at a higher level relative to GDP. If the guarantees to state owned enterprises are included, the ratios may be higher. Therefore careful risk management will be needed given that two of the main credit rating agencies have put SA’s sovereign-risk rating on negative watch. BUSA sees the 2013 MTBPS as creating a ‘breathing space’. In the meantime, the weak current account situation and the increasing debt-to GDP ratio underscore the need to continue with fiscal consolidation • The MTBPS says that  the main budget deficit is offset by surpluses by provincial governments, public entities and social security funds. This could be a temporary situation. As provincial surpluses for example are apparently the result of underspending, this offset will cease if provincial governments are to be encouraged to spend their budgets in ways which promote implementation of worthwhile projects

  12. CONCLUDING COMMENTS

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